Weaker consumer spending had a detrimental impact on Japanese GDP. This will increase pressure on the Bank of Japan (BoJ) to justify its policy stance and could call into question the likelihood of the next consumption tax increase.

15/02/2016

Keith Wade

Chief Economist & Strategist

Contributes toUnstructured Learning Time

The Japanese economy contracted in the final quarter of last year with real GDP falling 0.4% quarter-on-quarter. Economists had expected weakness, but this was a disappointing outcome that was largely driven by a sharp 0.8% quarter-on-quarter contraction in consumer spending. It would seem that the Japanese consumer has never really recovered from the increase in consumption tax in April 2014 - the more tax-sensitive durable goods expenditure has declined in six out of seven quarters since then. In many respects though, this is still a surprise as household incomes have been boosted by a tight labour market, a factor we expect to continue in 2016, adding support to personal expenditure through stronger income growth.

The latest news will increase pressure on the BoJ to justify its policy stance. Governor Kuroda can point to the decision on 29 January to introduce negative interest rates. However, so far all they have to show for this is a flatter yield curve , while the yen has strengthened and the equity market has weakened. On balance, it is difficult to see any net financial stimulus from the BoJ’s action to date.

Some relief can be taken from the decision by the People’s Bank of China to strengthen the Chinese yuan today, which followed Governor Zhou Xiaochaun’s comments at the weekend on China not seeking exchange rate depreciation. However, Japan must realise that it will be more difficult to play the currency depreciation game given the change in China’s policy this year. The focus therefore will be on the domestic economy and the critical wage negotiations in the spring (known locally as the shunto). Meanwhile, Prime Minister Abe must be having increasing doubts about the next increase in the consumption tax scheduled for April 2017.

This month we look at the prospects for trade and the dollar, the case for withdrawing extraordinary stimulus measures in Europe, and forthcoming elections in emerging markets.

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